Financial Daily from THE HINDU group of publications
Monday, May 29, 2006
Financial Daily from THE HINDU group of publications Monday, May 29, 2006 |
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Stock Markets Markets - Outlook Columns - A Ringside View JAYANTA MALLICK
A WORRIED LOT: A file picture shows a stock dealer's reaction when trading was suspended for an hour at Bombay Stock Exchange on May 22 (Monday) following a 10-per cent or 1111-point crash - the biggest in the history of the BSE. - Paul Noronha On May 2, when the Sensex at around 12,000 points was attracting a P/E of 21.02, many of the global players felt that the risk of a significant correction in the Indian market was low. In terms of 12-month forward earnings, Dalal Street bellwether index was at a premium (18.9 times), higher than the US, emerging and Asian markets. Until then the Indian benchmark had shown a year-to-date return of about 27 per cent. A strong expectation of positive returns for Asian and emerging markets was in the air.
To sell or not to
Even though some were troubled by a number of macro-economic indicators such as deteriorating current account deficit, inflation and monetary conditions, very few could resist the temptation of the unfolding India story. The impacts of the upward biases in the interest rates that had already crept in and fuel prices were broadly overlooked. Some of the recent reports had indeed indicated - "perhaps" - it was time to sell the Indian stocks. A few had a quaint feeling that this expensive equity market was relatively more at risk if an emerging market or Asian market sell-off occurred. But large-scale exits were not on the horizon. It is still not the reality now. However, the corrective phase that set in may continue or end depending upon global and domestic dynamics.
Points to ponder
If the international appetite for Indian equities reduces after the convulsions witnessed between May 11 and May 20 on Dalal Street, it may mean a paradigm shift in investment strategies in the short-to-medium term. FIIs have pumped out money from the Indian market from May 11 till May 25. It is also clear that money flow to the overseas funds meant for India declined in the last week. Certain overseas funds have made relative tactical calls for shift in the context of both emerging markets and Asia Pacific (ex-Japan). Some others are wondering how the volatility risk, a new and largely un-quantified element for the Indian market, could be priced in. Interestingly, the perception of a fair-valued level for the local benchmark index in the global funds circles now varies widely - between 8,500 and 11,500 points. Granting that the concept of buying opportunity at a lower level is different for each fund manager or strategist, broad tactical signal one gets is mixed as of now. Some overseas fund managers believe that other markets within Asia or even emerging markets may come up to a premium valuation in the next two to three months. A slow international fund switchover to China, Russia, Taiwan, South Korea, Singapore and South Africa is a possibility in the backdrop serious concern over hardening US interest rates and inflationary pressure. Simplistically, a slowdown in overseas funds flow could weaken the rupee and, in response, domestic interest rates may firm up further, which, in turn, is likely to have a negative impact on the economic growth, making Indian equities less attractive. Long-term overseas fund managers know well that in a semi-regulated market, policymakers, and their interventions from time to time, play a crucial role. If they monitor India's current account deficits and foreign exchange reserves and domestic consumption, they would also be watching local investors' on the Street. When everyone wants others to make a directional call, even the cash-flush long-term domestic investors, who have been nudged into a rescue act, have a limitation. Until July 25, when RBI takes a call on the interest rates, relative performance of the rupee and tightening monetary conditions, even the long-term overseas players perhaps would like to go slow on Indian equities. Till then mutual funds, FIs and banks are likely to take the driver's seat. It appears that Dalal Street may witness a range-bound movement in the indices in the short-term with a certain measure of steadiness. Return of liquidity-driven momentum, however, may be amiss for couple of months and the Sensex may under-perform in relation to other indices in the commodity economies and emerging markets.
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